Take corn, for example. Prices rallied strongly early last week on drier than expected weather conditions, only to lose all of those gains by Friday.

But rather than lament situations like these that cause such erratic price movements, they actually offer a chance to profit. As I’ve said in the last few columns, the grain markets make for good speculative bullish trades, as they’re not only at the mercy of the weather, but are also trading at their most recent lows.

If there is a sustained weather disruption, we could see very quick, wild movements. Continue to look at December 2009 or March 2010 call options for the grains that trade on the floor of the Chicago Board of Trade.

Moving on, let’s take a look at the latest in the oil market, which continues to amaze most veteran traders…

Another Erratic Summer For Oil

Cast your mind back to early June…

September crude oil futures hit a high just under $75 per barrel. Then comes word of possible Congressional legislation that would curb speculation in the oil market. In addition, the weekly supply data shows ample reserves of crude oil.

Result? Oil prices tank by $14 to $60.

So instead of looking higher, oil looked like it was ready for a possible trip back down to $30. But this is the oil market – and it’s rarely so clear-cut.

With more “skewed” government reports, which hinted that the economy was improving, that was all oil needed to come roaring back with a vengeance. It quickly added another $11 per barrel to its current price of $71.

Two Ways To Play The Oil Market’s Moves

It would be great if markets always based their moves on fundamental data. Much easier to figure out future direction.

But markets are irrational. And right now, oil is heading higher in the short-term, due to the money flow back into the market, regardless of the deep oil supplies at our disposal. But if you’re looking to make money in the markets, you need to go with what the market gives you, not what you want it to do.

If you’re interested in getting involved in the oil market (long or short), there are two ways you can play it.

1. Futures and futures options, which trade on the floor of the NYMEX. Stick with limited-risk option positions.
2. The main ETF that represents the oil market and tracks the price movements – United States Oil (NYSE: USO). This is a less expensive way to get in on the action and doesn’t require a commodity trading account to play it.

Currently, USO is trading at $38 per share and has options available, too. If you’re bullish or bearish, pick an option expiration period at least three to six months in the future, as that will give you more time to be correct with your directional call.

Sugar High

Lastly, we want to alert you to the sugar market, which is making extreme upside moves at the moment.

Having kicked off its rapid upward run in April, sugar has ramped up its pace even more in recent weeks, hitting highs not seen since 1981!

I like to call these “blast-off” moves because if you look at the daily chart, you’ll see a straight-up vertical move. Moves like this occur only a few times a year and can happen in any market. They also usually indicate that we’re entering the last phase of the bull run.

What Goes Up Must Go Down… How To Prepare For Sugar Downside

The main reason for sugar’s massive move is news from India that indicates a potentially low crop size.

However, all markets reach a level at some point where the news is factored in. And when we see blast-off moves like this, we can sometimes see a quick and dramatic price turnaround. And in sugar’s case, this would be a reversal to the downside.

If you want to try and capitalize on this, you can buy put option contracts or sell limited-risk call option spreads on sugar – both of which trade on the floor of the ICE/NYBOT exchange. At the moment, October 2009 and March 2010 option contracts are the most active.

That’s it for this edition.

Lee Lowell

Source: How to Profit from These Three Erratic Markets

You see, on my recent trip to Kentucky’s Bourbon Trail, one thing stuck in my mind: TAXES. I was utterly shocked when I heard what the distillery tour guide was saying about a $13.50 per gallon tax on any distilled bourbon. That’s over $700 of taxes per barrel. And that’s before the bourbon even gets to the bottle. For me and you, fellow Whiskey Shooter, there’s another tax when we get to the counter—somewhere around 6%.

So what’s the total bourbon tax?

According to the Kentucky Distillers’ Association, around 53% of the cost of the average-priced bottle goes to local, state, and government taxes.

I guess that’s why the tour guide took the time to tell us about the taxes. That way we wouldn’t be bitter when we paid $30 for a bottle of “corn juice.”

So the tour went on and our group wandered through the rest of the distillery — tasting the freshly distilled 160 proof grain alcohol, feeling the corn mash and playing in the gift shop…

But wait. Isn’t this taxation that same kind that created rebellions?

My tour group, and Americans in general, have been lulled to sleep, as if Uncle Sam slipped us a Mickey. Last I checked, the U.S. isn’t an alcohol supplier. Nor is it a real estate agent. Nor is it a car lot. But it seems like the current administration wants to get its hands on everything.

And the way things are going, who knows what’s next…

The Latest Nickel-and-Dime “Tax”

You gotta give it to ’em: At least Washington came up with an appropriate nickname for its latest cash grenade. It’s called “cash for clunkers,” and last week the House approved the bill — with your money!

It simply amazes me that something this poorly thought up could pass so quickly through the largest legislative body in the U.S. Just think about it: 435 well-paid pairs of eyes took a look at this bill. And a majority OK’d it!

In case you haven’t heard of the latest clunker of a bill, let me give you the rundown…

It’s a $4 billion plan to subsidize sales of new cars with better mpg. Essentially, if you have a car that gets less than 18 miles per gallon and you “upgrade” to a new car that gets at least four more miles per gallon, you’re eligible for at least a $3,500 tax credit.

I love the well-accepted term “tax credit.” Does everyone on the Hill think we’re that easily swayed by bills that contain such positive-sounding phrasing?

Here at the Whiskey Bar, we aren’t that easily fooled. This “tax credit” is a simple euphemism for free money — money that you and I as U.S. taxpayers are providing. Simply put, it’s taking money from our pockets and giving it to new car buyers in an effort to jump-start new car sales.

I don’t know about you, but paying for my neighbor’s car wasn’t on my agenda today.

But let’s dig a little deeper, since we could be footing the bill…

The bill, as it stands, is less likely to be affecting normal car owners — so this is for our SUV/truck-driving neighbor. Because even if you bought a 1990 Chevy Cavalier or Ford Taurus, you’re still probably getting well above 18 mpg.

So obviously, this bill is almost strictly for those non-Peak Oil-thinking, overzealous SUV or truck buyers. These folks have roughly the same restraint and foresight as those who purchased houses that they couldn’t afford.

This bill is almost comical. But frankly, where does the spending stop on Capitol Hill? Combine this with the latest auto bailouts and it’s really starting to look like our nation has turned into a new and used car lot.

Things are getting scary ’round these parts.

Government Spends, You Save…

Those dollars in your pocket aren’t looking as great as they once did. And as I see it, with an overburdened and overspending government, the dollar could be in for a crude awakening.

That’s because one thing is for sure: Over the next few years, the world is going to spin, the U.S. government is going to spend, and all of this will be running on the same fuel: oil.

As I wrote a few months back, the price of gasoline is going to rise. And that mainly stems from the rising price of crude oil.

As you know, the world’s commodities (most notably oil) are priced in U.S. dollars. As the dollar weakens, and as the Earth still spins and demands more energy, the price of oil is going to rise.

In my opinion, over the next three months to five years, oil is going to rocket — even more so than the price of gold. We got a taste of what can happen when oil spiked last year to $147 per barrel. And from my standpoint, it’s inevitably going to be back to those levels, or higher.

My best advice for protecting your hard-earned dollars over the next five years is simply to invest in all facets of the oil industry: oil service companies, oil holding companies, oil technology companies, and the commodity itself (through ETFs or commodity options).

Sure, the Obama administration wants to improve mpg, but one thing is for sure: We’re still going to be burning oil for decades to come — more and more every year. And although we may hit some rough patches for demand, the overall trend line is going to be UP.

By investing in oil, you’ll protect your wealth and profit at the same time.

After all, we all want to be able to afford our next bottle of bourbon.

Stay ahead of the curve,
Matt Insley

Source: Taxing to Better Mileage?

1) Gold

David recommends investors hold 5% of their portfolio in gold to hedge against a declining dollar and an inflationary economy. He says investors can easily buy gold through the SPDR Gold Trust ETF (NYSE:GLD). This tracks the price performance of gold bullion without the hassles of finding and storing the physical metal.

2) Inflation-Adjusted Treasuries

Also known as TIPS, these government bonds are actually guaranteed to beat inflation. That’s because the bond principal and the amount of interest paid increase in step with the Consumer Price Index. David says the easiest way to buy TIPS is through the iShares Barclays TIPS Bond Fund (AMEX:TIP). This year Treasuries have lost 3.9%. TIPS have returned 3.6%.

3) Energy Stocks

Oil and gas are priced in dollars. This means they tend to rise in an inflationary economy. David says an easy way to buy into energy stocks is through the Vanguard Energy ETF (NYSE:VDE), which is up 29% since its March low. VDE includes companies that specialize in drilling; equipment provision; exploration; refining; and marketing, production and transport of oil and gas products.

4) Commodities

David recommends investors consider the PIMCO Commodity RealReturn Strategy Fund (MUTF:PCRDX) as an easy way of tapping into commodities. This fund matches the return of the commodities futures market by buying commodity-linked index notes.

Table of Contents:

• Oil Production: Why OPEC’s Keeping a Lid on Production
• Oil Prices: Why Crude Thrives on the Diving Dollar
• Oil Outlook: The Coming Oil Price Shock
• Investing in Oil: The Best Companies, Stocks and ETFs

Oil has staged an impressive rally since dropping below $35 a barrel in mid-February.
And while there remains a risk that prices will retreat further due to sluggish demand, there are also three very compelling reasons why oil is still a safe long-term bet:

• OPEC has made substantial progress in reducing the amount of oil on the market.
• The dollar has been made vulnerable by the U.S. Federal Reserve’s aggressive policy of quantitative easing.
• And low oil prices and tight credit have reduced global energy investment, putting future supply at risk.

There’s no question that downside risk remains. On April 13, the Paris-based International Energy Agency (IEA) lowered its demand forecast by 1 million barrels a day, and now expects the world will use about 83.4 million barrels per day in 2009. That would be 2.4 million barrels a day, or 2.8% less than last year.

But so far dwindling demand has failed to contain oil prices.

As Money Morning predicted in its annual outlook series, the first quarter was a volatile one, in which oil prices tested the low $30s before surging over $50 in recent market rally.

And analysts are almost completely united in the view that, despite its short-term volatility, declines in production, exploration and development, and the value of the dollar will drive oil prices substantially higher in the years ahead.

Oil Production: Why OPEC’s Keeping a Lid on Production

The members of OPEC generated tremendous revenue from oil prices that soared over $147 a barrel last year. However, just as the world’s top oil producers began looking for ways to spend their massive stockpiles of cash, prices began a plunge that would see crude lose more than three-quarters of its value.

In a desperate effort to put a floor under oil prices, OPEC – supplier of 40% of the world’s oil – has issued three production cuts totaling 4.2 million barrels per day (bpd), or nearly 12% of its capacity, since September.

While the cuts have not yet been able to return oil prices to the group’s desired price range of $60-$70 a barrel, the cartel abstained from making any further reductions at its latest meeting in March and even voiced optimism that crude would reach $60 a barrel by the end of the year.

“That suggests to us that not only does OPEC have the firepower to support this oil price, but there’s enough internal agreement between OPEC members that they can actually achieve it,” Tom Nelson, an analyst for the Guinness Atkinson Global Energy Fund told BusinessWeek.

Many analysts had speculated that OPEC members would ignore the quotas and continue to produce oil to generate income, thereby rendering the cuts ineffective. But OPEC’s discipline has proven many critics wrong.

Despite foot-dragging from Iran and Venezuela – two countries that rely heavily on oil revenue to fund massive social programs – OPEC has gotten about 80% compliance on the 4.2 million bpd production cut. Historically, the cartel only gets about 60% compliance on such cuts.

As of February, Saudi Arabia accounted for about 46% of the 3.4 million bpd decline in production, according to PFC Energy. And the United Arab Emirates have fully complied with their share of the cuts. Iran’s compliance by that time was only 33% and Venezuela had only adhered to half of its commitments.

Still, Abdallah El Badri, OPEC’s Secretary General, estimates the production cuts will take about 800,000 bpd of supply off the market, significantly reducing the overhang in global markets, BusinessWeek reported.

OPEC officials from Libya, Algeria, and Iraq have all said that oil prices will reach $60 a barrel by the end of the year.

“One of the reasons why OPEC felt able to roll over quotas was that they do appear to have set a floor for prices,” Mike Wittner, an analyst at Societe Generale SA (ADR: SCGLY), told Reuters. “According to a lot of the balances, including ours, if you have OPEC holding steady or cutting a bit more, you get a big, counter-seasonal stock draw in the third quarter.”

Oil Prices: Why Crude Thrives on the Diving Dollar

Crude futures doubled from July 2007 to July 2008, soaring from about $74 a barrel to a record-high $147 a barrel. Much of that rise can be attributed to supply and demand, but there was another catalyst for the soaring prices that few investors recognized: The rapid decline of the dollar.

From July 2007 to July 2008 the dollar plunged 16% against the euro. And as the dollar became less valuable the cost of commodities around the world skyrocketed.

At the time, inflation – not deflation – was the predominant concern among the world’s leading economists, as a decade of low interest rates and unconstrained lending in the United States sucked the life out of the dollar. And while inflation is nowhere near the levels it reached last year, it’s important to recognize that the policies of the U.S. Federal Reserve are no less inflationary.

The Fed has cut its benchmark lending rate to a range of 0%-0.25%, and soon after, Fed Chairman Ben S. Bernanke said the central bank would purchase up to $300 billion of longer-term Treasury securities and $750 billion of mortgage-backed securities as it pursues a policy of quantitative easing.

This announcement by the Fed, along with a corresponding rise in equities, has been the driving force behind oil’s recent rally.

Ultimately, the same fear of inflation that typically drives investors into the gold market is similarly buoying oil prices. And even though the dollar has yet to be seriously affected, there’s no ignoring the fact that the more than $1 trillion worth of government bonds and mortgage-backed securities injected into the market will imperil the dollar’s value.

Oil Outlook: The Coming Oil Price Shock

Now that a weak dollar and reduced production have bolstered oil prices, there is a growing concern about how much higher crude will climb once demand returns. Tighter lending conditions and a trough in oil prices have badly crimped investment and jeopardized future supplies.

More expensive energy projects such as oil sands have been put on hold and the number of drilling rigs at marginal shallow-water fields around the world has been scaled back to a three-year low.

Oil drilling activity dropped 43% in the 12 months through March, with year-over-year oil exploration in the United States alone down 38%. High bids for offshore drilling rights in the central Gulf of Mexico fell by more than 80% compared with last year.

OPEC has said that with oil generating substantially less revenue as many as 35 new projects could be delayed past 2013.

“I have often described unsustainably low oil prices as carrying the seeds of future spikes and volatility. In a low-price environment, the trend is often to focus on survival instead of expansion,” said Ali al-Naimi, the Saudi oil minister. “If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices.”

The current economic crisis could reduce future oil supply growth by 8 million bpd, according to a recent study by the Cambridge Energy Research Associates (CERA).

CERA now says that production will grow by just 7.5 million bpd over the next five years, down from the 14.5 million bpd increase it predicted last summer. According to the research group, as demand recovers throughout that span, production will struggle to keep up and a new commodities bull market, similar to the one seen in 2008 will begin.

“Seven consecutive years of rising oil prices – unprecedented in the history of the oil industry – have come crashing down, thus burying the notion that the commodity price cycle was a historical relic,” said the report.

CERA isn’t the only organization worried about the lack of investment in new oil projects, either. The International Energy Agency (IEA) – energy advisor to 28 industrialized nations – has also issued warnings about a coming supply crunch.

The IEA estimates daily oil demand will rise from the current level of 86 million barrels to 106 million barrels by 2030. To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.  About 7 million bpd of additional capacity needs to be added to the market by 2015.

“Unless sufficient companies have the will and financial ability to invest through the down cycle, there is a real risk that supply growth may lag the eventual rebound of demand, leading to substantial price increases – possibly as early as this year,” Richard Jones, the IEA’s executive director said at a recent conference in London.

Jones estimates that as much as 2 million bpd of expected new oil production has already been deferred.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”
The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“Every bull market in oil is really born in the zenith of a bear market,” said Phil Flynn, an analyst at Alaron Trading Corp. “The cutbacks we see today are going to lead to a spike somewhere in the future. The big question is when it’s going to happen.”

Investing in Oil: The Best Companies, Stocks and ETFs

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

”Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Money Morning Contributing Editor Horacio Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ’spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”USO

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Keith Fitz-Gerald, Money Morning’s Investment Director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR: CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP (UGA).

Source: Three Big Reasons Oil Prices Will Rally Back Big Time

This from Investment U:

You might think you’re properly invested in oil, but you could be wrong.

Despite reaching lows since 2004, the long-term outlook for oil is still up. Maybe not $147 a barrel like the old days (i.e. six months ago), but because of supply, demand, turmoil in the Middle East, and the fact that we will eventually resume worldwide economic growth, oil prices have only one way to go.

If you think you’ve positioned yourself according, or if you’re thinking about a new investment in oil… tread carefully. Here’s why:

I covered a situation last week call contango. It’s a feature of futures markets where you can buy oil cheap right now and lock in a contract to sell it in the future for a higher price. Normally, the difference between those prices is so close to the cost of storing the oil that it’s not a profitable trade.

But right now, we’re in a state of super-contango. Prices are way out of whack. And commodity investors are storing oil everywhere they can to earn the excess profits. (For a more detailed description, see contango.)

Contango is big news now. But some of the “traditional” oil investments that are being tossed around aren’t what they seem to be. In fact, if you skipped some very fine print, you could have set yourself up for a huge disappointment.

So let’s clear that up… and pad our pockets with a little extra in the process.

You’re Not Buying What You Think You’re Buying

When we broke the news on contango, we suggested looking at some oil storage providers, explorers and drillers. And that hasn’t changed. Looking around, there are a number of “oil investments” that look promising.

One would think the quickest way to invest in rising oil prices would be to simply buy shares of an oil-based ETF, like United States Oil (NYSE: USO). These oil ETFs are very popular – USO trades over 34 million shares per day.

But not so fast.

These funds don’t buy and sell oil for profit. They trade futures contracts on oil. And while there are a few ways to do that – some good, some bad – they may not be the best way to take advantage of contango. Let me explain.

USO buys a contract for oil for the very next month. Before it expires, they sell it off and buy one for the next month. In a contango situation the returns will indisputably be lower. (Conversely, during the opposite of contango, “backwardation,” the fund returns will be higher).

USO makes no secret of this. They print it in their risk disclosures that contango is not good for their fund.

And they are not alone. The iPath GSCI Crude Oil ETN (NYSE: OIL) and the Powershares DB Crude Oil ETN (NYSE:OLO) use the same methodologies. (Though OLO actively manages its roll forward strategy to reduce losses.)

But don’t give up on investing in oil.

Every Problem Has a Solution

In fact, the same manager that runs the USO fund runs another, custom designed to benefit from situations like this. It’s called the United States 12 Month Oil Fund (NYSE:USL). It uses a 12-month average of futures prices that will lessen the losses caused by a contango market.

Here’s the interesting thing. Oil markets usually exhibit a small amount of contango, it’s a natural result of price fluctuations. But its opposite, backwardation, is the rarity. So even if we were in a normal oil situation, wouldn’t the 12 Month Fund be better?

In fact, wouldn’t it make sense all the time? It would seem to be so.

Obviously, oil prices have been down… but you’d have fared significantly better investing in USL. Reading the fine print on an ETF isn’t the most entertaining way to spend your day, but it’s certainly worth a near 15% difference in performance.

If we were to enter a backwardation period, USO would then outperform. But since backwardation is so rare… you can expect USL will outperform consistently over the short and long term.

Source: The Wrong Way to Profit From Oil

To find that answer, let’s look at a chart of Light Crude Oil ($WTIC).

The most obvious thing to note here is just how bad oil’s downtrend has been. But that doesn’t mean that prices can’t move higher.

But calling a bottom isn’t easy. Many a fortune has been lost by people attempting to call a bottom. So to avoid as much risk as possible, you need to look for something called a confirmation point.

A confirmation point is any point on the chart (usually a resistance line) that tells you that a trend has really formed and it’s time to ride it.

In the chart of oil, I noticed a possible ‘Reverse Head and Shoulders’ pattern in formation. This is a bullish formation. But for this pattern to work, you have to wait for the price of the equity to rise above its shoulder lines.

In the case of oil, that’s about $53 a barrel.

In other words, you should only become a buyer IF and ONLY if the price of light-crude pops above $53 a barrel.

Until then, enjoy the low gas prices. They could drop even further.

This from Money Morning:

Oil prices have fallen 70% since hitting a record $147.27 a barrel in July, which means in just five months, crude has given up all the price gains it made in the past four years.

After such a wrenching plunge, many analysts believe the outlook for the “black gold” remains bleak – and in the short term it certainly is. In the long run, however, dwindling supplies, resurgent demand, and a lack of investment will cause crude oil to double, triple, or even quintuple in price over the next few years.

In fact, the Paris-based International Energy Agency (IEA) – energy advisor to 28 industrialized nations – says oil will rise to $100 a barrel by 2015, as a result of a major “supply crunch,” and will ultimately soar to $200 a barrel.

But before it does, prices are likely to sink even further, perhaps falling as low as $20 a barrel in the first quarter of the New Year.

Indeed, much of Wall Street expects oil prices to average about $50 a barrel in 2009. Some of the firms and their specific forecasts include:

• Deutsche Bank AG (DB, which says oil prices will average $47.50 for all of next year.
• Merrill Lynch & Co. Inc. (MER), which predicts that prices will average $50 even.
• Moody’s Investors Service (MCO) also says crude will average $50 a barrel in 2009, but says that average will increase to $55 a barrel for 2010.
• Goldman Sachs Group Inc. (NYSE:GS) is slightly more bearish, predicting that prices will average $45 for all of next year – after falling as low as $30 in the 2009 first quarter. (It’s worth noting that Goldman – just five months ago – predicted oil prices would hit $200 a barrel in 2009).

But analysts also agree on something else: When the recessionary tide finally recedes, all of the factors that drove oil to its record high last summer will once again be exposed, and crude again will again soar to record highs.

“We may see prices drop lower – into the twenties, even – but there’s a better-than-average chance that they’ll be back over $70 a barrel by the end of next year,” says Money Morning Investment Director Keith Fitz-Gerald. “That’s where firms like Goldman and Merrill are getting all of these ‘middle-of-the road,’ $50-a-barrel estimates. And it’s why investors who buy in through the first quarter could enjoy compelling returns at the end of the year.”

In the meantime, however, low oil prices are crimping investment in new capacity, a reality that will lead to much higher prices down the road.

Just ask the IEA.

IEA: Rising Demand + Lack of Investment = ‘Supply Crunch’

According to widely respected energy advisor, global oil demand will slide 0.2%, or 200,000 barrels per day (bpd), this year, falling to an average of 85.8 million bpd. But the IEA also says that oil demand will advance by an annual average of 1.6% between 2006 and 2030.

The bottom line: Regardless of any short-term pullback, daily demand will rise from the current level of 86 million barrels to 106 million barrels in 2030. In other words, daily demand in 2030 will be 23%.

To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.

About 7 million bpd of additional capacity needs to be added to the market by 2015. And right now – because of marketplace changes – the financial incentives to make that happen just don’t exist.

Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects, and the costs of both labor and materials have skyrocketed. At the same time, the steep drop in oil prices has put even more pressure on energy companies to curtail their investments rather than increase them.

Earlier this year, for instance, ConocoPhillips (NYSE:COP) and Saudi Arabia Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000 bpd export refinery at the Yanbu Industrial City.

“We see and hear about energy investments being delayed … this is a major worry and could lead to a supply crunch and much higher oil prices than we’ve seen before,” said Fatih Birol, the IEA’s chief economist.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”

The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“While the situation facing the world is critical, it is vital we keep our eye on the medium to long-term target of a sustainable energy future,” Nobuo Tanaka, the Paris-based agency’s executive director, told reporters in London. “While market imbalances will feed instability, the era of cheap oil is over.”

While it’s probably true that the “era of cheap oil” is in our rearview mirror, a new question has arisen: Just how high do oil prices go?

According to some analysts, the IEA’s target price of $200 a barrel is far too conservative.

$500 Oil?

The lack of exploration and development is certainly a problem. But a much bigger issue is the fact that output from the world’s existing oil fields has sharply declined.

“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.

And output from the world’s oilfields is declining faster than previously thought.

In its “2007 World Energy Outlook,” the IEA estimated that output from the world’s existing oilfields was declining by 3.7% a year. But in its latest report, published in November, the IEA revised that estimate to an annual decline of 6.7%. (The November report was based on the first major study of the world’s 800 largest oil fields.)

Unfortunately, the IEA is behind the curve.

For nearly a decade, Matthew R. Simmons has said that the world’s oil production was nearing – or already at – an “inflection point.” While his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” was scoffed at when it was originally published back in 2005, Simmons is now viewed as perhaps the preeminent expert on the so-called “peak oil” movement.

“Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied,” commodities guru Jim Rogers told Fortune magazine. “And now, of course, people are starting to say, ‘Oh, well, I thought of that.’”

Simmons, chairman of the Houston-based investment bank Simmons & Co. International, poured through hundreds of technical documents submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years.

“I finished reading the last paper on a Sunday afternoon,” Simmons told Fortune, “and I sat back and thought, ‘Holy crap, this is unbelievable. I’ve just discovered the biggest energy illusion ever in the world. We’re in big trouble. I’m going to write a book.’ ”

Much of the alleged Saudi Arabia subterfuge has to do with a complete lack of transparency with respect to the Organization of Petroleum Exporting Countries. After OPEC decided to base its production quotas on reserve figures in the 1980s, several of the cartel’s producers suddenly raised their levels of  “proven reserves” by 40% or more.

Back in 1988, for instance, Saudi Arabia raised its proven-reserve figure from 170 billion barrels to about 260 billion barrels. That figure has remained more or less constant since then, despite the fact that billions of barrels of oil have been pumped out of the ground.

“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers told Money Morning during an exclusive interview in Singapore recently.  “It’s astonishing.  The figure never goes up and it never goes down.  They have produced dozens of millions – billions – of dollars of oil in that period of time.

“Every oil country in the world has declining reserves except Saudi Arabia,” Rogers said. “And I know that every oil company has declining reserves.  So unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.”

Simmons thinks oil prices could hit $300 a barrel – and could possibly even surge as high as $500 a barrel – during the next several years.

“Black Gold” Profit Plays

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

Chevron was actually recommended as a “Buy” by Money Morning Contributing Editor Horacio Marquez in his “Buy, Sell or Hold” column earlier this year.

“Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ‘spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (ADR:PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Fitz-Gerald, the Money Morning investment director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR:CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (NYSE:USO), the iPath S&P GSCI Crude Oil Total Return Fund (NYSE:OIL), or the United States Gasoline Fund LP (NYSE:UGA).

Source: Why Crude Oil Will Present Investors With A Golden Opportunity In 2009

This from Sovereign Society:

The “Elastic Rubber Band” theory is a popular investment term to describe wide price swings in asset markets. Market moves are usually exaggerated on both sides of the trade and this year’s volatility in oil prices is a testament to that swing.

In a bull market, trends tend to rise far above anyone’s boldest predictions while the same is true when a major reversal lends to big price declines. Could anyone have possibly predicted crude oil would be trading at $35 six or even twelve months ago?

Now oil producing countries are looking to arrest a crash in oil prices – down a formidable 76% since peaking in July at US$147 a barrel. Oil now trades at a 4-year low and is down a dizzy 62% in 2008 – its first calendar year decline since 2001. In late 1998, amid the Asian economic crisis and the Russian debt default, oil prices bottomed at US$10.50 a barrel (see above chart).

Is it possible we’ll see US$10 oil again? I don’t think it will happen, barring another Great Depression.

Global governments are in the midst of the greatest expansion of credit in modern history. As liquidity eventually finds its way back into credit markets and lending commences once again, commodities, including oil, should find a bottom. That’s what happened in 1998 as the Asian economic crisis ended; ten years later, oil is still trading 233% higher though down a mind-boggling 76% from its all-time high in July.

O.P.E.C. (Organization of Petroleum Exporting Countries) announced production cuts of 2.2 million barrels per day this week to stem the rapid decline in crude. With the global economy now either in recession or heading into a serious period of economic contraction in 2009, demand for oil and other distillate products has declined sharply since September. China, the largest importer of most raw materials and the world’s third largest importer of oil, saw exports decline in November for the first time in years.

It would seem logical to assume that oil prices have clearly overshot to the downside at this point. I would imagine most of the decline in global demand has already been priced into oil at $35 a barrel. The fact is, global long-term supplies are not being replaced by annual production, with most oil fields now in decline.

Only several months ago, the world stood at a net deficit of about 2 million barrels per day or, roughly, 86 million barrels of demand per day against supplies of 84 million barrels. Now that gap has not only narrowed but, in the span of just three short months, has turned into a gusher as supplies overwhelm producers.

It’s unlikely that a new bull market is taking hold in oil any time soon. We’ve just had a bust. Yet it would be a mistake to dump oil and the energy stocks at this point after huge declines since July. If anything, this is the time to buy oil ahead of aggressive U.S., European, Chinese and Japanese economic stimulus in 2009. If history is any guide – the Asian experience ten years ago, a depression by all accounts, eventually saw oil bottom at a ridiculously low level – it’s hard to believe we’ll see $10 oil again.

Source: Elastic Band Theory Stretches Oil Price Crash

News that OPEC that it will cut production by 2.2 million barrels a day had virtually no effect on the price of oil, where it still bumps along the bottom of a four-year low of about $43.

Oil is a boom-and-bust business. Prices will inevitably rise. But when and by how much remains in the hands of Tarot card readers.

Until oil returns to higher prices, alternative energy will remain the domain of melodramatic soccer moms, green-niks, marketers and hucksters.

The price of oil has plunged 30% since October.

By next year, global consumption could drop by 1.3 million barrels a day, or 1.5%, according to Deutsche Bank.

Goldman Sachs has gone as far as to predict that oil may fall to $30 a barrel or lower next year if China’s economy continues to slow down.

Although China may still be forced into a massive alternative energy build-out to stem billions (if not trillions) lost to horrible pollution, the U.S. seems bent on green as a more of a feel-good initiative.

President-elect Obama touts green as part of a national infrastructure expansion to help create new jobs. Given current and near-term oil prices, however, it seems that American taxpayers will end up subsidizing alternative energy.

Americans also feel compelled to go green as a means of cutting air pollution from coal and oil.

It would cheaper and easier for energy companies to install scrubbers rather than pay the green premium. In the end, green could become a marketing program more than a real solution.

Making the assumption that the U.S. economy will eventually recover, there is still no guarantee that our energy consumption will increase – further eroding the need for alternative energy.

On December 17, 2008, the U.S. Department of Energy (DoE) published a presentation that forecast electricity usage dropping to 1% annual growth by 2030 versus 9% in the 1950s. This presentation shows the steady decline of electricity usage over the past 40 years.

This sounds counter-intuitive. But the DoE cites factors such as efficiency, industry standards that stress product uniformity (and hence lower manufacturing costs) and the overall conservation by consumers.

The study also shows that since 2007 alarmist forecasts for electricity consumption are higher than actually use by approximately 5% – a trend that the DOE expects to see well into 2030.

This particular statistic is important to alternative-energy investors. The typical PowerPoint business development pitch is larded with overly optimistic projections that entice investors to part with their money.

The DoE’s numbers were based on higher oil prices. But the agency still forecast that coal and natural gas will supply about 50% of America’s energy needs by 2030, with nuclear and renewable taking up the slack.

Now that oil prices have dropped much faster than the DOE originally expected, it only makes sense that renewable energy will comprise only a fraction of our national energy mix.

In the meantime, investors should look elsewhere for profits.

This from Money Morning:

Many of my neighbors here in Oregon are enjoying the big decline in gasoline prices, particularly those who still own SUVs, pickup trucks or any of the other fire-breathing, piston-clanking monstrosities I’ve seen on the road recently.

And no wonder. Gasoline prices in our neck of the woods have fallen between 60% and 70% since July, when oil closed at a peak price of $145.29 a barrel. Here in Oregon, that means that my wife and I don’t feel like we’ve been mugged every time we fill up.

But what happens when the prices start going up again? Global demand for oil will fall this year for the first time since 1983 as the world financial crisis saps demand, the International Energy Agency said a week ago. That has some people believing that prices will remain low.
But I wouldn’t bet on it – at least not for long.

The Organization of Petroleum Exporting Countries (OPEC) is making loud noises that it wants to see $75 a barrel again soon, which would represent a 70% increase from the $43.60 a barrel where oil closed yesterday (Tuesday). OPEC, supplier of more than 40% of the world’s oil, is ready to make a “big” cut in supplies when it meets in Oran, Algeria, today (Wednesday), Venezuelan Oil Minister Rafael Ramirez told journalists.

How much of a production cut we’ll see is anybody’s guess, depending on who does the cutting and who actually abides by the agreement over time. But we’ll know very shortly.

Russia recently announced, after years of going it alone, that it wants to actually join OPEC. Now OPEC has asked Russia to cut oil output by between 200,000 and 300,000 barrels a day to help revive prices, OAO Lukoil Chief Executive Officer Vagit Alekperov said in Moscow on Monday. And Russia may well do just that.

A price of $60 to $80 a barrel would be consistent with a global production cut of about 2.5 million barrels, and that’s a figure apparently supported by OPEC representatives we spoke to.   Leonid Fedun, OAO Lukoil’s deputy chief executive officer, noted in a recent Bloomberg News report that “there is a consensus [among members] to reduce production.”

This highlights something that’s often missed in the Western media, where the price of oil is typically associated with the price of gasoline and how that price impacts driving habits. According to CNN, MSNBC and a whole host of others, evidently that’s what matters to us.

But in OPEC-producing countries, it’s a different story. There the price of oil is more typically associated with external trade relationships and hard currency requirements that are policy level decisions often made at the expense of individual concerns. And I don’t have to remind you that most OPEC member countries don’t exactly specialize in freedom of choice, so the odds are high that what the energy ministers want, the energy ministers will get … but that’s a story for another time.

Here’s one other point to consider: With all the media’s focus on OPEC, there’s been little mention of China, India and the whole host of emerging markets that are still experiencing double-digit growth in oil demand. That’s not going away.

The bottom line here is that it would behoove interested investors (and people who like to drive less fuel efficient cars) to hedge any potential future rise in gasoline prices sooner rather than later. Here’s one quick and dirty way to do it.

If you drive 20,000 miles a year and your car gets 30 miles to the gallon at a time when fuel costs $1.75 a gallon, you are looking at an annual fuel bill of $1,166.67. If OPEC gets its wish and oil rises by 70%, gas prices may rise in tandem. Therefore, buying the equivalent share value of your projected annual fuel expenditure in such exchange-traded funds (ETFs) as the United States Oil Fund LP (NYSE:USO), the iPath S&P GSCI Crude Oil Total Return Fund (NYSE:OIL) or the United States Gasoline Fund LP (NYSE:UGA) could be just the ticket.

As prices rise, so, too, will the value of your investments. If prices fall further, you’ll obviously lose money, but you’ll be paying less at the pump at the same time.

Granted, what I am proposing is not a perfect hedge. Among other things, there are potential capital gains to contend with when you sell 12 months from now – taxes, transaction costs and a whole host of other variables that could come into play. At the same time, you could simply alter your driving habits, which, of course, would change the value of your calculations midstream.

None of that really is material, though. Hedges are never perfect.

But they do offer you a chance of “being in the neighborhood” when it comes to protecting your wallet from what could be vastly higher oil prices to come.

Source: Pledge to Hedge: Three Ways to Lock in Low Gas Prices Right Now